Hindalco share price spike fuels FPO talk

Hindalco Industries's shares on Tuesday hit a 52-week high of Rs 177.10 on the BSE, rising 6.8% from the previous close after brokerage CLSA upgraded the stock to 'buy' from 'sell' and said the stock would double in the next four years.

But senior analysts from other brokerages are sceptical about the optimism shown by CLSA.

In a report published on June 30, CLSA said it is now valuing Hindalco's US arm Novelis earnings multiple at eight times as compared with six times before. "We now value Novelis at 8x EV/EBITDA (vs 6x before) – in-line with peer average. We believe that stock could double in four years once Novelis's new units, India smelters and Mahan coal mine fully ramp-up. We upgrade FY15-17 EBITDA by 6-9%," CLSA said in a report, giving a target price of Rs 215.

"Eight times EBITDA multiple is ridiculous. In a cyclical industry like metal giving a four-year price target does not make sense. It seems the company could be considering a follow-on public offer or QIP, which is leading to such a flurry of reports," a senior analyst from a Mumbai-based brokerage told dna said on condition of anonymity.

CLSA, however, claimed that Novelis could be a big beneficiary of the accelerating shift of global automakers from steel to aluminium given its strong franchise and upcoming capacities. Novelis has aluminium production facilities across Asia, North America, South America and Europe.

As per global aluminium major Alcoa, aluminium body sheet content per vehicle is expected to rise 10 times by 2025. Novelis would be able to take advantage of this shift as it is setting up new autograde capacities, CLSA said.

"Novelis is increasing its auto finishing capacity by 600,000 tonne by 2015-end. We expect Novelis's Ebitda/tonne to rise from $330 in fiscal 2014 to $380 by fiscal 2017 led by rising proportion of higher-margin autos in the product mix," it said.

While analysts said there would be improvement in Novelis following higher usage of aluminium by automakers, they also pointed at higher competition in the segment.

CLSA itself in its report has pointed that Novelis share in auto segment is 9% while other global aluminium major like Alcoa, Constellium, and Kaiser Aluminium have a share of 9%, 16%, and 10% respectively.

"Global majors like Alcoa have in past stressed that major business is coming from aerospace segment, where Novelis' holds zero market share. So despite higher demand of aluminium from automaker Novelis may not benefit substantially due to higher competition," the above quoted analyst said. He believes that in best case scenario the stock will not rise beyond Rs 170-180 over next 1-1.5 years.

Giriraj Daga, senior analyst with Nirmal Bang Securities, is also not very positive on Hindalco mainly due to domestic operations of the company. He has a 'sell' rating for the stock.

"Novelis will see gradual improvement in volume and EBITDA per tonne in future. However, I am concerned about local operations. Hindalco's three new projects Utkal, Mahan and Aditya, in which the company has invested Rs 35,000 crore are most likely to get an EBITDA of Rs 2,500 crore at a peak capacity, which would be reached in 3-4 years," Daga said. These assumption are after factoring in that the company manages to get coal from Mahan coal mine. The Mahan block, located in Singrauli district of Madhya Pradesh, an equal joint venture between Hindalco and Essar Energy is likely to help the company to cut its electricity cost which account for 40% of input cost.

However, this EBITDA would not be sufficient to cover interest costs on these new projects.

"Return ratios on new investment will continue to be under pressure. The only saviour for the company could be aluminium prices, thus the stock is likely to under-perform the metal sector," he said.